Prodigal Sum? Dialing Into Prodigy’s Planned IPO

Gone in mostly everything but name, Prodigy wants to capture some of the
interest in consumer ISPs with its own dialing-for-dollars attempt on Wall
Street with an IPO. The challenge, as we see it, is convincing investors
that Prodigy still means anything as just an access provider.

The math behind the moves: Both Earthlink (NASDAQ:ELNK) and Mindspring
(NASDAQ:MSPG) trade north of $1,000 per subscriber. If Prodigy’s 638k subs
were valued at similar levels, it implies a $600-plus million valuation for
the reborn outfit.

If so, that’s not a bad return on investment for the Mexican-led investment
group that took over the last vestiges of a once-great and clear leader in
the online space.

Two years ago, after 15 years of growing it to be the leader in online
services only to see it decline, Prodigy’s original founders, IBM and
Sears, finally sold the struggling online service to International
Wireless, controlled by Grupo Carso SA de CV.

But first, how did Prodigy blow the lead they once enjoyed?

In 1995 Prodigy was king of the online world in a vision of instant stock
quotes, chat, e-mail, news, easy sign up and a whole lot more. On 12/31/95
the service had 1.1 million subscribers.

Then management came up with
the brilliant notion to charge its users for every e-mail above a monthly
limit. $0.25 per e-mail, if memory serves.

At the same time, AOL carpet bombed the planet with its sign-up disks,
recruited ex-Prodigyites with special forums on AOL where they could
console themselves for not paying e-mail fees. AOL built a better
interface, and IBM and Sears agreed to disagree about Prodigy’s direction.

The Internet showed signs of threatening “online” services, the Web browser
debuted and usurped some of the pizazz for user-interface and shifted focus
to an “open” network.
GNN/Yahoo/Magellan/Infoseek/Lycos/Excite(Architext) popped up, and Prodigy
limped along thinking it was 1993 and not the dawn of the TCP/IP era.

Where is Prodigy today? For the six months ending June, it generated $67.3
million revenue. Annualized, that implies $134.6 million. If we take the
per-sub comps, back out some value vs. its peers for it playing “catch up”
in a race it once ruled, we think Prodigy could go public anywhere between
3x to 5x revenue.

Holding it back in valuation in our view: the radically different nature of
the current enterprise vs. its original offing, the AOL gorilla factor (it
owns CompuServe now and has 13 million global subscribers), the MSN as
portal/access reborn-again effort, Earthlink and Mindspring, and 4,000 ISPs
coast-to-coast who offer exactly what the new-fangled Prodigy does: access.

The $31.9 million losses for the first half of the year also won’t help.
But to be fair, Earthlink posted a $4.8 million loss before charges for its
second quarter.

Some 45% of new enrollments to Prodigy come through PC bundling deals.
Prodigy has $35 million cash on hand, some of that thanks to an infusion by
Telmex this year of $45 million (it owns 20.9% of Prodigy, while Carso
Global Telecom owns 65.3%).

New subscribers cost about $120 in marketing fees for any ISP. Or they can
outright acquire them for $200 per-sub as Mindspring often does.

While Prodigy has lost a substantial amount of its subscribers over the
years, going from more than 2 million to a fraction of that, its latest
quarter showed that subscribers began growing again as its Classic
subscribers switched to Prodigy Internet (access with a front end supplied
by Excite).

If, and once public, Prodigy will have to have its stock go on a shopping
spree for more subs, other ISPs, and boost working capital to market the
service. AOL is in a different league than Prodigy today. Earthlink, with a
Sprint deal that feeds it subs annually, and Mindspring, which buys ISPs at
the rate of about one a week, are the ones to beat. But catch it first.

The question is, how much will a brand that has lost its original luster
generate the sort of interest of front and center Internet stocks, gross
proceeds, prodigal sums?